Consignment vs. Turnkey
Manufacturing
Choosing Between Turnkey and Consignment Manufacturing
To remain agile, stay ahead of the market, and react quickly to disruptive changes in the technology
environment, many companies outsource the manufacturing of their electronics products. Making the
decision to outsource, however, is only part of the choice these companies face – they must also decide on an
outsourcing methodology – two common models are consignment manufacturing and turnkey
manufacturing.
The paper explains, compares and evaluates consignment and turnkey manufacturing to help small- to midsized companies select the electronics manufacturing outsourcing strategy that best fits their needs.
Consignment Contract Manufacturing
Consignment manufacturing can be best thought of as “partial” outsourcing. In the case of electronics
manufacturing, it describes a model in which the technology producer maintains some portion of the overall
manufacturing supply chain in-house – typically, purchasing and/or system assembly (box and build). Under a
consignment model, in-house purchasing, shipping and receiving groups are responsible to obtain materials,
sort and package them for production and deliver them to the contract manufacturer for assembly.
Emerging companies often choose to begin production of their electronic components under a consignment
model. They may be unaware of the existence of turnkey contract manufacturers, they may believe that no
turnkey contract manufacturer can properly handle their particular component or small order sizes, or they
may have made an investment in in-house manufacturing supply chain resources that they wish to re-coup.
Turnkey Contract Manufacturing
Turnkey manufacturing describes a complete manufacturing function that
provides all manufacturing and supply chain services, including material
acquisition, assembly, test, and aftermarket service and warranty support.
Product design and design for manufacturing may also be services that
are provided by the contract manufacturer (CM). In other words, the
organization outsources all inventory control, receiving, kitting and
production management functions – and possible all design and warranty
service as well – to a third-party contract manufacturer who is responsible
for manufacturing all aspects of the product in question.
Advantages of Turnkey
Manufacturing:
• Access supply chain and
production economies of
scale
• Minimize inventory risk
• Take advantage of latest
technology without
capital expenditure
Some of the most innovative companies choose a turnkey model right from the start, recognizing that their
business model will be driven by the sales and marketing of innovative products and not by the
infrastructure-intensive manufacturing of those products. This model allows new companies to avoid risk,
keep a low overhead, and move quickly to meet market demands.
Which is Better?
The consignment model is today becoming less popular as companies focus on reducing costs and remaining
agile to address rapidly changing markets. That said, there are some cases where it may make sense – such as
when a product relies on a highly specialized component that may be supplied specifically for that company,
or in cases where a company’s intellectual property is contained in a component or a board.
But for the majority of product marketing companies in which manufacturing is not a core business practice,
turnkey manufacturing is the wisest choice over both the short and long term. By outsourcing all
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manufacturing functions to a third-party CM these companies can focus on their core competencies while
taking advantage of the production economies of scale offered by an established contract manufacturer.
While some companies may feel vulnerable in relying on a third party to meet delivery commitments to
customers, high-quality turnkey manufacturing is more likely to improve product delivery because established
and proven processes are used. Companies relying on turnkey manufacturing also tend to innovate and
produce new products more quickly, as they are free to focus on market research, product development and
sales and are unhindered by costly manufacturing infrastructures. A CM’s entire focus is on manufacturing,
while a tech company will often find that its resources are pulled in many directions when difficulties arise or
when delivery crunches occur.
Cost-Benefit Analysis
In addition to offering enhanced process, quality assurance and delivery capabilities, turnkey manufacturing
helps electronics manufacturers reduce production costs by lowering or eliminating many of the supply-chain
and overhead costs associated with the manufacturing process. Many of these costs are overlooked or not
well understood when companies initially decide to use a consigned model.
To calculate the true cost of managing
materials under both a consignment and
turnkey model, we must first examine all
overhead, hard costs, and assumed risks
involved in the production supply chain.
That supply chain must necessarily
involve extensive administrative
functions: accounts payable, purchasing,
inventory control, receiving and kitting,
and management overhead. In each of
these areas, the company assumes human
resources overhead, hard costs associated
with salaries, financing, etc., and risk.
•
The figures shown in the diagram at left
are based on a company with $1.5 million
in materials expenditures and 2.5
inventory turns per year. Some key points
for this company to consider when
assessing its true cost of consignment
include:
• The significant cost of
controlling one’s own inventory.
The hard cost in this area
includes inventory financing,
shrinkage costs, and salary
overhead.
• The human resources tradeoff.
Because only part-time staffing is
required in this situation, the company must choose between three suboptimal scenarios: try to find
and manage suitable part-time staff; hire one staff member to perform multiple jobs, likely without
proper expertise in any of them; or, outsource to various consultants, likely at higher cost.
Significant risk is assumed at each stage of the supply chain.
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In addition to eliminating much of the risk, a company such as the one profiled above stands to save more
than $107,000/year by using a turnkey model rather than a consigned approach.1 The most impressive cost
savings will be found in three key areas:
Receiving/Kitting
Under the typical consignment model, companies outsource only the assembly portion of the manufacturing
process. Thus, organizations must prepare the products for manufacturing in-house, resulting in added inhouse kitting costs – including labour, and redundant shipping and receiving costs (the parts must be
delivered to the CM).
Contract manufacturers already have the infrastructures in place to prepare products for assembly, so their
cost is spread over a number of customers and products. In addition to adding costs, the consignment model
can result in duplicated effort at this stage if the products are not prepared properly for the contract
manufacturer’s particular processes. In such cases, the manufacturer must adjust the materials or return the
components to the company – resulting in wasted time and added costs. Component quality issues and kitting
errors cause production delays on the assembly line – it is always best for the CM to receive, test and prepare
the components that it will assemble.
Inventory Financing & Labour Costs
By spreading inventory financing and labour costs across multiple projects, a contract manufacturer’s costper-product is always less than the same costs dedicated to a single company or product. CMs also offer
economies of scale as well as various inventory financing options that assist with cash flow.
While the turnkey model offers significant inventory and labour cost savings, many early-stage companies that
have already invested capital in these areas believe that they must retain their existing supply chain assets to
re-coup their investments. The above cost analysis, however, demonstrates that a contract manufacturer can
offer lower per-project labour and inventory financing costs than an in-house team, since the manufacturer
specializes in those areas and the costs are spread across multiple projects.
The Right Decision
At OCM Manufacturing, we have observed that turnkey contract manufacturing is the ideal manufacturing
model for most early-stage companies and small- to mid-size companies. Even many established companies
with in-house supply chain departments are switching to a turnkey model for their new product ideas, or will
“test the waters” of turnkey outsourcing with established products that are in maintenance mode.
Offering significant labour and inventory cost savings and allowing companies to focus on innovation and
their core competencies, the turnkey manufacturing model is a viable choice for companies that have made
the decision to outsource the manufacturing of their electronics products to a contract manufacturer.
Contact OCM for a customized cost comparison model.
We will use our turnkey/consignment comparison cost calculator tool to estimate
the expected savings you can realize by taking advantage of our turnkey electronics
manufacturing services.
Contact one of our Program Managers today, at 1-800-268-3961
1
Estimate is based on industry averages, OCM’s costs, and is output using OCM’s cost calculator tool.
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